Tax-credit flap stalling Hercules, Onesto

A year-old court ruling on how the sports and entertainment venue in America's Playground was financed with federal historic tax credits is having widespread impact on rehabilitation projects in Ohio and across the country.

What does historic Boardwalk Hall in Atlantic City have to do with the revitalization of the Hercules Engine Co. property and the reopening of Hotel Onesto?

Right now, everything.

In fact, a year-old court ruling on how the sports and entertainment venue in America's Playground was financed with federal historic tax credits is having widespread impact on rehabilitation projects in Ohio and across the country.

"A significant number of projects in Ohio have been stalled because of this," said Joyce Barrett, executive director of Heritage Ohio. "There are not that many corporations involved in the (tax-credit investment) process, so there are not that many partners to go to."

Construction was expected to begin last summer at the Hercules project at Market Avenue S and 11th Street SE. Cormony Development wants to turn a 125,000-square-foot brick building into 95 market-rate apartments. The 11-story Hotel Onesto, which developer Steve Coon is transforming into luxury condos, also has been hampered by uncertainty in the historic tax credit arena.

Officials believe that sufficient market-rate living space is the key to transforming downtown Canton, with both Hotel Onesto and Hercules providing the biggest opportunities.

TAKE ON MORE RISK

Since the mid-1970s, the National Park Service, Internal Revenue Service and state officials have administered the Federal Historic Preservation Tax Incentive program, which offers a 20 percent credit for the renovation of historic buildings. Those credits have helped spur urban renewal projects across the country. Ohio has a similar historic tax credit program.

Many developers rely on tax-credit investors to help finance projects, especially larger ones where they aren't able to leverage the entire value of the credit by themselves.

A tax-credit investor, often a bank or publicly-held corporation, agrees to provide capital for the project, becoming a part owner. In exchange, it receives an allocation of tax credits that it can use to offset its federal income tax liability, according to the National Trust Community Improvement Corporation. The process is known as "syndication."

Tax credits cannot be sold outright, so an investor seeking such credits must have a bona fide interest in the project.

In August 2012, an appellate court ruled that a partnership between the New Jersey Sports and Entertainment Authority and Pitney Bowes for the restoration of Atlantic City's Boardwalk Hall was not valid. Pitney Bowes was not a bona fide partner for federal income tax purposes because it had been insulated from any risks, according to reports. The court reassigned all associated tax credits to the New Jersey Sports and Entertainment Authority, a state agency.

The U.S. Supreme Court in May declined to hear the case, which has left some investors in rehabilitation credit skittish. To ease those fears, the IRS and Treasury Department have planned to issue new guidelines that would act as a "safe harbor" for investors. Those guidelines have yet to be issued.

Page 2 of 3 - Barrett of Heritage Ohio, the state's historic preservation agency, said that roughly 50 projects across Ohio that rely on federal tax credits are at a standstill.

"Because the tax credit was called back, Pitney Bowes lost millions in this tax-credit deal," Barrett said. "A lot of investors who are typically syndication partners have stayed away and they've been waiting for a treasury department ruling for how to proceed in the future because no one is willing to take the risk if they don't know the rules any more."

INVESTORS

In 2008, the Hercules project qualified for $36 million in state and federal tax credits for what was then an estimated $178 million project. After the collapse of the financial markets, though, investment money dried up. The Hercules project was paused until financing could be lined up.

The project was eventually divided into phases, the first being the $28 million market-rate apartments that should have started taking shape this summer. Other phases could include a boutique hotel, restaurants, retail and office space and a convention center.

Cormony Development had lined up a $13.8 million from Huntington Bank and $3 million loan from the city of Canton, among other investments. It has about $15 million of tax credits for the first phase.

The financing was supposed to work like this, according to Robert Timken, a managing director for Cormony Development: Huntington provides money for construction. Once complete, tax-credit investors become part of the project, swapping money for tax credits that they can use to offset their tax obligations. The money provided by these tax-credit investors is used, in turn, to pay off Huntington's construction loan.

"I cannot tell you they are committed at this point," Timken said of Huntington. "We are talking with them and everything has been very positive and we're moving toward a commitment on their part, but absent a tax-credit investor they are not willing to commit to financing at this point. ... The tax-credit investors have to be there."

Huntington officials declined to comment.

If it experiences further delays, Cormony may have to plead with the Ohio Department of Development to extend its deadlines to use the state credits. The ruling in the Boardwalk Hall case and the pending guidelines by the IRS do not impact state credits, however, the same investors and projects are involved.

"We are very much in a hurry-up-and-wait mode," Timken said.

APPLES TO ORANGES

Developer Steve Coon said work on Hotel Onesto and projects that his company, Coon Restoration, is prepared to start for other developers have been held up. He said he has $6 million of projects that his company could begin now.

"It's pure labor," Coon said. "We're not a general contractor. ... If they don't get this straightened out I'm going to have guys laid off in the next three or four weeks. That's a shame."

Page 3 of 3 - Coon said the Boardwalk case has tainted the historic rehabilitation industry. He said other projects leveraging tax credits are following the rules. "It's comparing apples to oranges," he said.

"These historic tax credits all happen in downtown urban areas where there is really not that much investment," Coon said. "Our downtowns are just starting to come back to life and they've just stepped on our throats."